IMF Wraps Up 2025 Euro Area Consultation
Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the 2025 discussions on common euro area policies with member countries. [1] This year, the consultation also included a discussion of the findings of the Financial Sector Assessment Program (FSAP) exercise for the euro area. [2]
Growth in the euro area is likely to stay moderate over 2025-27. Trade tensions and elevated uncertainty are expected to weigh on activity, despite some boost from higher defense and infrastructure spending. In addition, the geopolitical situation in Europe is expected to dampen sentiment and weigh on investment and consumption, despite looser monetary policy and projected gains in real income. Headline inflation is projected to remain broadly at target from the second half of 2025, while core inflation will return to 2 percent in 2026.
Risks to growth are on the downside while they are two-sided for inflation. Trade policy uncertainty, potential tariff escalations, and ongoing geopolitical tensions may negatively impact demand and growth more than previously anticipated. These factors are expected to outweigh any positive effects of unanticipated fiscal easing, particularly if countries increase defense spending. Regarding inflation, lower-than-expected non-energy goods prices because of trade diversion, weaker-than-expected activity and wages, as well as the recent euro appreciation could result in inflation below the baseline. On the other hand, fiscal spending could turn out larger or more inflationary than in the baseline, while geopolitical tensions, supply chain disruptions, and tariff escalation could lead to higher import prices, and wage growth may not moderate as strongly as expected.
In an increasingly challenging global environment, a comprehensive policy strategy is needed for decisive EU-level actions to boost Europe’s growth potential and financial resilience. This includes reforms to strengthen the EU single market, enhance energy security, and orient the EU budget to invest in common public goods. Ensuring debt sustainability and securing financial and price stability are essential prerequisites for the successful implementation of these reforms.
The euro area FSAP found the banking system to be adequately capitalized and liquid overall, while some banks would dip into their buffers under stress. It identified financial stability risks stemming from interlinkages with non-bank financial institutions and called on the authorities to enhance data sharing, strengthen systemic risk monitoring, and conduct system-wide stress tests. While welcoming progress on several fronts, including the strengthening of banking supervision and introduction of the new Anti-Money Laundering Authority, fragmentation continues to hinder the development of more resilient, deeper, and integrated euro area-wide financial markets. The FSAP recommended fully implementing the international capital standard for banks (Basel III); strengthening the resources and prudential powers of the European authorities overseeing nonbank financial institutions; introducing a common deposit insurance system; making bail-in requirements more flexible; and strengthening arrangements for liquidity in resolution.
Executive Board Assessment [3]
Executive Directors welcomed the resilience of the euro area’s economy, marked by record‑low unemployment, declining inflation, and a stable financial system. Directors recognized that higher US tariffs, trade and geopolitical tensions, and elevated uncertainty are weighing on the euro area outlook and creating downside risks to growth, while risks to inflation remain two‑sided. Some Directors also highlighted the impact of Russia’s war in Ukraine. Directors encouraged the authorities to take decisive European Union level actions to place the economy on a stronger footing in a more complex global environment.
Directors emphasized the necessity of deepening the single market to stimulate investment and innovation. In this context, they welcomed the proposal for the adoption of a 28th corporate regime aimed at establishing a uniform set of regulations and legal standards to facilitate firms’ expansion and innovation. Directors agreed that advancing the capital markets union is vital for channeling savings to innovative projects, while lowering barriers to cross‑border bank mergers would allow for more efficient provision of banking services across the single market. Directors also agreed that the introduction of the digital euro could help deepen the integration of financial services.
Directors agreed that coordinated efforts at the EU level are essential for addressing shared challenges and helping member states manage fiscal tradeoffs, emphasizing the significant role the EU budget can play in this regard. They called for reforms to create a more streamlined budget that is responsive to changing needs and emphasized that strengthening the financing framework through regular borrowing paired with resources to support debt service will allow for a more ambitious EU budget.
Directors encouraged the authorities to continue to advocate for a stable, rules‑based global trading system. They further noted that deepening and diversifying global partnerships, while removing remaining internal trade barriers, can help strengthen supply chain resilience and capture efficiency gains from trade.
Directors agreed that for countries with high debt and limited fiscal space, significant fiscal adjustments are needed to mitigate fiscal risks. They also stressed the importance of implementing credible medium‑term fiscal plans to address urgent and rising spending needs while ensuring fiscal sustainability. Directors generally agreed that the activation of the national escape clause of the EU fiscal rules should be limited to the initial phase of scaling up defense investment expenditures and not to finance recurring spending over an extended period. Directors concurred that non‑defense net current expenditures should remain consistent with adopted medium‑term fiscal plans and emphasized that it will be important to assess the impact of overall defense spending on debt sustainability on an ongoing basis.
Directors agreed that a monetary policy stance close to neutral is justified by close‑to‑target inflation and a mildly negative output gap. They concurred that increasingly communicating with greater emphasis on the forecast together with well‑designed illustrative scenarios and sensitivity analysis around a baseline would become more important to help guide rate expectations.
Directors welcomed the findings of the FSAP and agreed with the assessment that the banking system is generally well‑capitalized and maintains a healthy level of liquidity. However, banks’ exposures to contingent liquidity risks have increased and require continued monitoring. Directors therefore encouraged policymakers to continue to analyze systemically important banks’ counterparty credit risk and closely monitor vulnerabilities arising from the expanding nonbank financial intermediation sector including through the implementation of system‑wide stress testing. They underscored the importance of facilitating better data sharing among EU and national authorities while continuing efforts to close existing data gaps. Directors also highlighted the importance of strengthening the euro area financial architecture by completing the banking union with the introduction of a common deposit insurance system. They agreed that establishing arrangements for the Single Resolution Fund to offer guarantees—ideally supported by an EU fiscal backstop—is critical for enhancing the provision of central bank liquidity during bank resolutions and will boost the resilience of the euro area‑wide financial system.
[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. Staff hold separate annual discussions with the regional institutions responsible for common policies for the countries in four currency unions – the Euro-Area, the Eastern Caribbean Currency Union, the Central African Economic and Monetary Union, and the West African Economic and Monetary Union. For each of the currency unions, staff teams visit the regional institutions responsible for common policies in the currency union, collect economic and financial information, and discuss with officials the currency union’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis of discussion by the IMF Executive Board. Both reports subsequently are considered an integral part of the Article IV consultation with each member.
[2] Under the FSAP, the IMF assesses the stability of the financial system, and not that of individual institutions. The FSAP assists in identifying key sources of systemic risk and suggests policies to help enhance resilience to shocks and contagion.
[3] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summing up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .
https://www.imf.org/en/News/Articles/2025/07/10/pr-25248-euro-area-imf-executive-board-concludes-2025-consultation